Merchant Processing – Clear as Mud

Recently, many operators have been taking the plunge out of the Stone age and into the 21st century by accepting plastic.  Based on a recent study, the cost to handle cash was 6.5% of gross revenue. We agree that this is much higher than any credit card fee but will explain why the merchants are still hesitant to go away from cash despite this recent stat.

Adding electronic payment options to your parking facility(s) seems simple enough, right? Well maybe not as simple as you thought thanks to merchant processors.

In order to accomplish this goal, we have to pass through the oligopoly gates of Visa and Mastercard.

The irony behind the premise of moving towards electronic payment is that although all signs tell us to move in this direction, the payment processors are forcing people to stay in the Stone Age through their high fees, which make taking electronic payment on small charges nearly impossible.

As a quick 101, the fees that businesses pay when they accept a credit and debit card are called interchange fees. An interchange fee generally consists of a percentage and flat transaction fee, such as 1.51% plus $0.10.

Visa, MasterCard and Discover collectively have several different interchange fees for their respective brands, and each determines under what circumstances a particular fee applies. Variables such as card type, card brand, processing method, loyalty rewards, and transaction amount are all considered when determining which interchange fee will apply to a particular transaction. On top of this fee the gateway you use will take their skim as well adding to the overall fee.

These high fees have always been a complaint of merchants.  And because of the oligarchical nature of the industry, and also the high fees that this created, the government decided to try and step in and help correct the situation. In late 2011, Senator Durbin (D-Ill) put action forward to help resolve the issue but failed to see what implications this amendment would create for the many merchants that take electronic payment on small dollar transactions.  The government, in their attempt to regulate the industry, has taken electronic payments a step backward.

With good intention, the Durbin Amendment capped the fee that businesses pay banks when they accept a debit card. The cap is 0.05% plus a flat $0.22 cent transaction fee for cards issued by banks with $10 billion or more in assets.

A cap sounds good right? Not when you see that the rate before the amendment was 1.55% plus $0.04 that applies to swiped transactions of $15 or less.  On a transaction of $4 the fee was just raised from 10 cents to 24 cents.  Thank you government!

As you can see the cost of processing low value debit card sales (transactions less than $15) has now dramatically increased for businesses with small tickets. While this new regulation caps the interchange fees for regulated transactions and has saved billions of dollars for most U.S. merchants, it has created an unintended consequence of doubling, and in some cases, tripling the cost of interchange fee for small ticket transactions.

The table below shows the effective interchange cost based on average ticket sizes. As you can see, tickets below $12 were hit the hardest.

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Knowing this information, I don’t find it surprising that we started seeing a sentiment shift among businesses. Have you hopped in a taxi lately, or tried to buy a soda at the gas station? You may have noticed a small change. Check out a picture my colleague took while paying for gas recently.

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This amendment has recently passed, and merchants are slowly finding out about the significantly higher effective fees on their smaller ticket transactions.  As time passes and merchants become aware and react, we believe consumers will be seeing these restrictions more and more.

Parking operators are reacting with their hesitation to add electronic payment and with the convenience fees that are often tagged along with electronic payment options.  When you have a 50 cent processing fee tagged to a $3 parking fee it is hard to blame them for their actions.

In the end, the consumer is getting the short end of the stick in the parking industry and many others.  We should all take a deep look at this and do our part and lobby for change.

About the Author

Bob Youakim

Bob brings over 14 years of business development, finance and project management expertise to the project. Prior to founding Passport, Bob served as a Vice President in investment banking along with various audit and consulting roles. Bob received his M.B.A. from the Kellogg School of Management at Northwestern University and his B.S. degree from the University of Illinois. Bob is also a Certified Public Accountant.